It's Aviva Again!

Published in Investing on 8 March 2012

Does the insurance firm still cut it as a value play?

Aviva (LSE: AV) today released final results for the year ended 31 December 2011, so I can hardly avoid reviewing them in light of the fact that I have put most of my Value Portfolio into it, and also have repeatedly called it as an attractive play. With the total valuation of the portfolio right now at £77,096, Aviva at 360p represents about 67% of it.

The accounts of big financial institutions are usually dull and prolix to the point of inducing narcolepsy. Aviva at five separate sections for the online version is long enough, but they have way to go before taking on Royal Bank of Scotland's (LSE: RBS) eight-section monster, which I reviewed here recently. 

Unfortunately, share price performance is not directly proportional to report length. If I had to identify a relationship at all, it may well be an inverse one.

As always, my comments here are restricted to an opinion of the share strictly from a value viewpoint. That means I have no interest in most of the data in these results, even though other more conventional writers will find a lot of it worthy of reporting. Even though I understand it, cos I'm an accountant, the great majority of these mammoth accounts is just guff to me. 

One of the advantages of value investing as I see it is that one can distil the whole damn thing down to a very few salient and critical numbers. I don't do the kind of overanalysis you often see from others for two reasons. First, I don't think it improves the quality of share selection and secondly I'm easily bored.

The dividend

Okay, so what have we got here? The dividend and yield was the single biggest value feature upon which I based my argument for Aviva. I reasoned that the high yield, amongst the very highest in the FTSE 100, was unsustainable, so that eventually either the dividend would be cut or the price would rise. 

A dividend cut looked pretty unlikely because they had done just that in the recession, dropping it in 2009 to 24p from 33p previously, and thus a sharp price rise was likely due at some stage. Can't say when of course, but that big yield is a great inducement to hold the share whilst waiting for this to out.

Sure enough there has been no cut in the annual dividend in today's results, with the final payout held at 16.0p for a total of 26.0p. But that held final is a wee bit disappointing, and makes for a rise of only 2% for the year over the 25.5p of 2010. 

Anyway, at 360p, that gives a historical yield of 7.2%. The consensus forecast for 2012 is about 28.2p, for a forward yield of 7.8%.

Even if the 2012 forecast is possibly revised down a little, these are still very high figures and put Aviva third in the FTSE 100 yield table. So this is nowhere near outing yet with a yield something like 100% over the index average.

You could argue that this yield premium is deserved, because of the risks in this business. In fact, that is effectively what the market is saying to investors. But value investing requires that you go against the crowd, and be prepared to hang on until you are proven right, or wrong. And that requires in addition huge patience.

Book value and earnings

Looking at the other value criteria that I consider important, I make tangible book assets about 282p per share, so no value there. Most commentators and the company itself refer to the accounting net asset value of 435p, which is before deducting intangibles, or the insurance industry measure of embedded value at 595p. On those two measures, the shares trade well below book.

Earnings per share (eps) for 2011 was next to nothing at 5.8p, compared with a healthy figure of 50.4p the year before, due mainly to unrealised paper losses on some assets. The normalised eps forecast for 2012 is 55.6p for a forward P/E of 6.5, which is pretty low.

The directorspeak refers to the company continuing to perform well even in tough times. For 2012 they have increased their operating targets. On the face of it then this looks quite optimistic.

If you want reasons for the continuing refusal of the value to out, it is probably the fiscal uncertainties in Europe that cast a shadow over Aviva's share price. As long as they continue, the price may not rise significantly or to anywhere near the extent that I believe it has the potential to achieve. 

Insurance as a sector is pretty bombed out, as illustrated by four of the top ten yielders in the FTSE 100 being drawn from this business, so this isn't just an anti-Aviva mood. But it is exactly this kind of poor sentiment that creates value. 

The question is whether the stubborn refusal of the price to rise much owes more to fear than genuine problems. I believe it is the former, and these results have not changed my view. 

If I'm right, then at some stage that fear will evaporate into enthusiasm, because that's how the market works, causing sectors and shares to cycle in and out of favour over time. If I'm wrong, the shares may well be trashed again down to a very low level. They did fall to well 190p at the low point in 2009.

More from Stephen Bland:

> Stephen holds shares of Aviva.

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MAACPRIME 08 Mar 2012 , 7:50pm

Reuters is showing this on a PE of 12 - with an average for the multi-line insurance industry of 8.37. How come this is nearly twice the PE quoted in the article above? If the Reuters figure is correct, it's probable AV is trading higher than warranted given the demand for it from income-seeking investors.

Value for AV isn't going to out until Spain and Italy's economies recover. That's not going to happen unless they leave the euro. And that doesn't look a likely prospect until things get a lot worse for them. That probably means AV's value is set to trade in the £2.50-£3.50 range for years to come.

apprenticeDRL 08 Mar 2012 , 8:49pm

Im happy to hold in the meantime as long as the dividend is good

motivefinder 08 Mar 2012 , 11:31pm

I am buying tesco---------------- as emerging market growth potential plus US recovery -- its looks very attractive and dividend about a month away, SP at its bottom .

GoldenSoldier 09 Mar 2012 , 4:21pm

I found your analysis informative and helpful, Stephen. I had not realized that the eps for 2011 was only 5.8p. I was grossly overweight in AV, but after the losses I am now merely overweight. At the moment I plan to hold on hoping that I will recover my losses either through dividends or a re-rating.

custard1 13 Mar 2012 , 11:25am

News reports post-results highlighted as a great relief that Aviva's IGD surplus (assets beyond the minimum required by regulators, to my understanding) recovered from 2.2bn£ to 3.3bn£ during two months of modest market rally to Feb12. I actually found this volatility rather unsettling - if the FTSE were to drop back to 5000 on some new crisis, might Aviva be scrambling for cash?

Arborbridge 06 May 2012 , 7:49am

I suspect lots of smoke and mirrors with the different ways eps can be calculated. Compare the figures above with Company REFS which gives the normalised eps for 2010 as 30.7p, 2011 as 13.7p and the 2012 forecast as 55.9. The fact that the forecast is consistent with Stephen's number he quotes but the previous figures aren't, suggests there are several ways of calculating it, or one set is incorrect.


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